Let’s start with some definitions:
Liquidity: Defined as the availability of liquid assets to a company or market. As it relates to mortgages, banks and other mortgage lenders borrow money from others to lend to their borrowers and or sell their mortgages to others.Simply ABC Bank lends $100,000 to Jane and John Doe, ABC bank then sells that loan to Fred or Fran (Pun intended) for $105,000 making a $5,000 profit. Fred or Fran then collects the interest from Jane and John to make their profit.
Risk: Defined as a situation involving exposure to danger. As it relates to mortgages, Fred and Fran (above) take a risk as to whether or not Jane and John will pay their loan.Fred and Fran may decide not to buy loans when they have too much risk of not being paid or they may decide they need a larger profit to take more risk, higher interest rates.
Conforming, High Balance, Jumbo:These are terms used to define mortgage amounts and the numbers change by county, and property type. For example in Richmond County New York a single family conforming loan limit is $510,410, the High Balance loan limit is $653,550, anything above that is considered Jumbo.
Now that we all understand risk, liquidity, and loan limits here is what’s happening and how it affects home buyers, home sellers, and Real Estate professionals. Fred and Fran think that shutdowns of small business and unemployment are likely to cause borrowers to not pay their mortgages. Fred and Fran have three choices, one stop buying loans, two only buy lower risk loans, or three buy loans with a much higher interest rate. Although Fred and Fran have stopped buying the riskiest loans, people with very bad credit or no ability to prove their employment, they are still buying. Fred and Fran are however being very picky buyers and only want to buy the lower risk loans.
Home Buyers: First the good news. If you are a home buyer who is an employee and still employed, has good credit (740+ FICO), and you need a conforming loan your in luck. Fred and Fran consider you the lowest risk loan and you will get a chance to buy and borrow at historically low rates. That does not mean everyone else can’t buy, it just means that Fred and Fran are changing the rules and maybe charging a higher rate for others. Two of the more recent examples of these changes are if you are a self employed borrower the underwriters (the individual who decides if you qualify or not) now have to deduct 25% of your income used to qualify since they assume you will experience that lossin your 2020 income translation, you now qualify for 25% less of a mortgage if you were able to borrow $400,000 a month ago you will only be able to borrow $300,000 now. The second example relates to interest rates, Fran and Fred believe that High Balance borrowers are a higher risk, for the financial experts. I know there’s more involved, but for you the borrower the end result is the same, a substantially higher interest rate in some recent cases 30 to 40% higher.Higher interest rate means higher payment which means less buying power again maybe 25 – 30% less. These changes are evolving daily as we come to terms with the new “normal” what that means for you as home buyers now more than ever you need a mortgage professional on your side to keep you up to date on what’s happening and to help guide you to the right mortgage for you. What you could afford and qualify for a month ago may now be very different. Be sure to consult with a professional before you purchase.
Home Sellers you have good news:! If you are selling an “affordable” home where your buyer is most likely to end up taking a conforming loan you will most likely not feel the effects of what’s going on. While nobody has a crystal ball and can say with certainty whether a market will go up or down the numbers, as explained above, would most likely lead to a lowering of prices. If borrowers can borrow less, they must pay less. Sounds pretty simple, unfortunately or I guess fortunately for home sellers it’s not. The unknown factor at this point is inventory, if more sellers decide not to sell and builders decide it’s too risky to build that could prolong what we have seen over the last few years and that is a low inventory of homes for sale which will either keep prices stable or maybe even see them continue to increase. The answer to that will remain to be seen and whether to sell now or not is always a decision unique to every seller’s circumstances. Now more than ever it’s important to have a knowledgeable, trusted, professional Realtor to consult with.
Real Estate Professionals: First, stay informed and know what’s going on in the mortgage industry reach out to a mortgage professional you work with to ask questions, if you don’t have that relationship established it’s time to do that. If you are working as a buyers agent it may be a good time to reevaluate what your buyers needs are and they will definitely need a new pre qualification. If you are working as a seller’s agent be sure your sellers are aware of what’s going on and how it may affect them, if you are fortunate enough to have an offer or even a contract on your listing be sure to reach out to the lender and confirm nothing has changed since they originally met with their borrower. When you are evaluating new listings keep the conforming, and high balance loan limits in mind, while they do not determine a value they may determine a more salable price point.
For anybody experiencing real pain or loss this is not meant to belittle that in any way. If you are a new home buyer, seller or professional in the industry you may feel like this is the end, those of us who have been through turmoil before, natural disasters, financial crisis’, and others, this too shall pass and with it many changes that will affect all of us but we do move on and things do get better!
Charles Martino is the president and owner of Martino Realty Group and Richmond County Mortgage and is here to help you with anything you need. Whether buying, selling or with your mortgage needs he can be reached via email or phone at Charles@martino-realty.com or (718)608-9400.
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